To our stockholders and friends:

In 2004, Security Bank continued building on the growth of the previous year amidst a markedly uncertain and more volatile market shaped by a confluence of domestic and global events. Under these circumstances, charting a steady course through the rough patches while keeping one’s focus on the customer required agility and quick response. As the consolidation trend in the banking industry gave rise to integration issues, we decisively kept our focus on ensuring our customers remained top of mind while we pursued the strategic directions laid out in our three-year plan. Underpinning this was a purposeful commitment to the execution of the tactical milestones embodied in our strategic blueprint.

We are pleased to disclose that our successful efforts have resulted in creating greater value for our shareholders. With the renewed confidence in the Philippine Stock Market, our share price reflected a solid 68% increase from 17.25 pesos at the start of the year to 29.00 pesos at year-end, a fitting endorsement by the investing community of the concrete value we have created for our shareholders. Leveraging on the collective commitment of our people and adeptly balancing opportunities with risk, net income grew to 757 million pesos, a 50% growth over last year. The growth in earnings was achieved even as we further increased cover for our non-performing loans (NPL) and non-performing assets (NPA) covers to 65% and 48%, respectively. Accordingly, these accomplishments translated to a 50% increase in earnings per share from 1.54 pesos in 2003 to 2.30 pesos in 2004. Return on equity, meanwhile, improved from the prior year’s 5.7% to 8.0%.

Our drive towards enhanced earnings was achieved through a 22% organic growth in resources from 72.6 billion pesos to 88.2 billion pesos without compromising our excellent asset quality as NPL and NPA ratios further declined to 6.7% and 13.7%, respectively. 

Our efforts at creating a superior balance sheet backed by a strong free capital base were affirmed early in the year when we issued Peso Tier 2 subordinated debt. The notes rated BB- by Fitch Ratings, one notch below the sovereign rating, were two times over-subscribed. The warm investor reception enabled us to increase the issue size from 2.5 billion pesos to 3.0 billion pesos, further improving our capital adequacy ratio from 16.8% to 21%.

Having built greater intrinsic value for the Bank, we have addressed shareholder returns by increasing our dividend payouts to 0.50 pesos per share, 67% higher than the previous year and resulting in an improved dividend yield of 1.7%.We are equally pleased to disclose that as of the first quarter of 2005, we have declared a regular semi-annual cash dividend of 0.25 pesos per share and a special cash dividend of 0.25 pesos per share further improving dividend yield to 2.5%.

We acknowledge the leadership of our President and our highly competent and dedicated management team as we mark the first year of our three-year plan with a sterling performance. Through the years, our Board of Directors have continued to provide invaluable advice, in adherence with principles of good corporate governance, as we aspire to continually excel towards greater levels of achievement.

In closing, we are grateful for the enduring relationships we have established with our customers and the communities we serve. We are confident that the future holds even greater promise for Security Bank and its stakeholders.

Keeping a steady course in rough seas is a daunting task. Negotiating a change in heading – and maintaining it – amidst turbulent waters presents a far greater challenge.

The global and domestic events that shaped 2004 provided an arduous environment for the financial services industry as a whole. While the global economy exhibited real GDP growth over the previous year, the energy sector was a source of surprises and economic shocks. Fueled by increasing market demand and concerns over production capacity, the trends in world petroleum prices proved a recurring navigational challenge as the price of crude oil increased 22% from 32 US dollars to 39 US dollars a barrel. Moreover, apprehensions over an unsustainable trend in US external balances prompted a weakening US currency particularly versus the euro and the yen. Coupled with concerns over rising core inflation, the US Federal Reserve adopted a measured monetary tightening stance as it increased its overnight rate by 125 basis points over the previous year. 

Meanwhile, the Philippine economy was plagued by fiscal uncertainties and a looming credit ratings downgrade. And though the peso was one of the weakest performing currencies in the region, overseas remittances along with the weakening dollar helped to ease some depreciation pressures. Interestingly enough, higher than expected GDP growth of slightly above 6% and improving profitability of blue chip companies provided the price momentum needed to boost the Philippine stock market to become the 5th best performing in Asia with the Philippine Composite Index rising 26 %. Nonetheless, credit demand remained lackluster while consumer pessimism slowed major purchases and instead increased propensity to remain liquid.

These conditions demand flexibility and agility of industry players. An institution has to be responsive to the opportunistic shifts in markets while keeping its focus on the path it has charted for itself. 

We are pleased to report that Security Bank managed all this and more, largely through the combined effort and focus of Security Bankers everywhere on our three-year strategic plan, F.I.R.S.T. Priorities. Launched in late 2003, F.I.R.S.T. Priorities was the result of drawing on management’s years of collective experience to chart a course for Security Bank towards a position among the top performers in the Philippine banking industry. Leveraging on the groundwork laid the prior year, 2004 was a crucial chapter of our three-year plan as Security Bank intensified further its focus on its CUSTOMERS. Customer focus figured significantly in our key decisions and our actions this year, entrenching itself as a way of work and life at Security Bank.

In line with our strategic focus and backed by a succession of notable accomplishments, there is indeed much to show by way of financial performance. 

Efforts geared towards managing our funding mix and asset deployment strengthened the Bank’s interest differential business in 2004, generating substantial growth in our net margins. This was further supplemented by fee-based income from service charges, fees and commissions, which combined with our interest differential income allowed Security Bank to register healthy revenues of 4.7 billion pesos, up 17% from last year’s equivalent figure of 4 billion pesos. As we set about implementing investments in support of our tactical objectives, we diligently managed our overhead costs resulting in an improved cost to income ratio of 55% over the prior year’s level of 56%.

All told, pre-provision operating profits (PPOP) grew 18% to 2.08 billion pesos from 1.76 billion pesos in the previous year. This translates to a PPOP return on average equity of 20.8%, which places Security Bank squarely among the leaders in terms of operating profitability in the banking industry. 

Net income after tax for 2004 of 757 million pesos grew 50% over the restated 2003 level, significantly ahead of our First Priorities strategic commitments.

Growth in the balance sheet was pursued without compromising the Bank’s fundamental profitability and asset quality. At the end of 2004, Security Bank’s resources totaled 88.2 billion pesos, an impressive 21% increase from the previous year’s 72.6 billion pesos. A key driver of this growth was a continuing build-up of our deposit base, which reached close to 55 billion pesos. The success in expanding our lower cost funding base remains a constant year after year, allowing us to further reduce our funding costs. Deposits generated, including funds sourced from our Tier 2 notes issue, were deployed primarily towards a 73% growth in our portfolio of investment securities, which totaled 34.9 billion pesos from 20.2 billion at the end of 2004. In addition, our loan portfolio grew by 10% to 41.4 billion pesos from 37.6 billion pesos last year. 

We continue to maintain superior risk asset quality with our non-performing loan ratio (NPL) at 6.7%, which is, as in years past, significantly below the banking industry average of 12.7%, even as the Bank set aside 1.2 billion pesos in provisions for probable losses for the year. Our sustained level of provisioning brought the balance of allowance for probable losses for risk assets to 3.9 billion pesos at the end of the year. With the success of our efforts at cleaning up our balance sheet through aggressive provisioning and accelerated collection of non-performing loans, we now have a very comfortable NPL cover of 65% after full coverage of accounts classified as loss. Capital adequacy ratio is likewise at a very strong 21%, which far exceeds the regulatory requirement of 10%, and is largely the result of the infusion of 3 billion pesos in Tier 2 capital from our subordinated notes issue early in the year.


It is also worth noting that in 2004, Security Bank adopted International Accounting Standards 12 on Income Taxes, under which the deferred income tax asset account is allowable only to the extent of probable taxable income. This upgrade in our accounting standards resulted in a downward adjustment in our surplus accounts for the prior years, with a corresponding restatement in the net income thereon, specifically increasing tax provisions for the prior years and reducing our 2003 net income figure by 126.7 million pesos to 506 million pesos.

With our robust financial performance in 2004 translating to a bottom line totaling 757 million pesos, our growth in net income year-on-year registered a remarkable 50% improvement. This translated to a return on average equity of 8.0%, up from the 5.7% return registered in the previous year. It also further improved our earnings per share from 1.54 pesos per share in 2003 to 2.30 pesos per share in 2004.
 

Winning Ways

Underpinning the excellent financial results were a series of programmed and well-executed activities. The year 2004 started off on an auspiciously high note as the investing public enthusiastically welcomed our Tier 2 capital offering. A vital component of the FIRST Priorities strategy, the five-year notes were rated BB- by Fitch Ratings and were more than 100% oversubscribed, prompting us to increase the total offering size from 2.5 billion to 3 billion pesos.

The beginning of the year also saw the successful delivery of other undertakings to further strengthen our balance sheet, among which was the first public auction of our acquired real properties in February. Encouraged by the highly satisfactory results, subsequent and likewise successful auctions were held later in the year. We also established two Special Purpose Vehicles (SPVs) in September 2004, providing the Bank with the flexibility needed to address the swift disposal of its non-performing assets and to avail of incentives and possible business opportunities granted under the SPV Act of 2002. 

The warm reception given these initiatives augured the acceptance that would later be received by a salvo of new products aimed at rounding out our value-added service offerings to our most important constituent: our customers.

In February 2004 we launched CheckRight, a checking account that allowed medium to large corporations to instantly automate the preparation, printing, and even reconcilement of their corporate checks with an easy-to-use software package and an Internet connection to our corporate cash management system, Security DigiBanker. 

The product gained a hefty following by year-end, exceeding its aggressive account balance targets by 40%.

This was soon followed by Security CheckPower, another current account enhancement that provided our customers with both a convenient means of payment and high interest rates for their operating funds. CheckPower was likewise very well received, generating more than a billion pesos in new deposits in just a few months time.

Our individual and institutional investor customers likewise benefited from dollar-based investment products that allowed them to diversify their portfolios while maximizing yield and minimizing risk. Secure Dollar Optima, a fixed-term dollar investment account, was introduced to guarantee investors a higher yield than most other dollar time deposit products in the market. Our Trust Division also added to the investor product family’s innovation momentum with the unveiling of the Security Bank Dollar Fund, a US dollar-denominated common trust fund (CTF) that allowed individuals and corporations with excess dollars to tap into our funds management expertise in order to reap the benefits of owning a diversified portfolio of US dollar-denominated securities. Combined with aggressive marketing of their existing competitive products, the dollar-based CTF was a vital factor in the Trust Division’s engineering a phenomenal 226% growth in total assets under management year-on-year, with the common trust fund component increasing 230% versus the industry average of 14.4%.
 

Sustaining Success

Given the constantly changing business and technology landscape, maintaining our capacity for steady innovation and a constant turnout of value-added products for our customers require that we routinely lay new groundwork for better and even more responsive services in the future. To this end, we took several steps to position both our electronic and traditional support infrastructure accordingly, practically all of which were undertaken and successfully concluded in 2004.

Early in the year, we started the implementation of the BPC SmartVista solution in order to integrate under a single and open platform both our ATM card and credit card transactions, paving the way for the delivery of seamless, integrated consumer card products in the near future. By the end of the year, the ATM side of the project was fully implemented, allowing development of related products under this platform to commence. The credit card side of the BPC SmartVista solution will be completed and launched in mid- 2005.


We continued to build on our core competency in managing market risk, as our treasury group purposely redeployed funds generated by the intensified deposit buildup into an asset portfolio that greatly enhanced both the yields of our gapping business and capitalized on trading opportunities arising from the price shifts and resulting volatility in the market. To further bolster this capability, we likewise began migration to the Misys OPICS system in order to upgrade the systems backbone that supports our Treasury Group. This will allow us to centralize and fully automate the deal capture, confirmation, settlement, credit and risk measurement, mark-to-market, and accounting aspects of treasury products, capital markets, and derivative instruments. Aside from improving our operating efficiency and controls, the new system also sets the stage for a broader range of foreign exchange and money market product offerings in the near future.

Towards the end of 2004 we forged a partnership with Asian FX Money Exchange and Travelex Money Transfer Ltd. (TMT) to expand the latter’s money remittance operations in the Philippines. The partnership agreement effectively put Security Bank’s 114 branches nationwide within the reach of eight million overseas Filipinos through TMT’s network of more than 59 countries worldwide that offer easy-to-use, secure, and convenient Internet-based remittance systems.

As for the equally important bricks-and-mortar aspect of our distribution channels, the strategic rationalization of our branch network to optimize its overall reach and accessibility to our customers continued in 2004. This included the relocation of three branches to areas with better business potential: Peñafrancia Avenue in Naga City, Doña Soledad Avenue in Parañaque City, and at the new Medical City Hospital along Ortigas Avenue in Pasig City.

In full acknowledgment of the invaluable role that our Human Resources play in sustaining our success thus far, we have undertaken a rigorous Bank Management Program geared towards supplementing the talent pool of our middle management. Consequently, in 2004 participants completed an intensive 7-month bank-wide training program and have been deployed to several departments across the bank. We have likewise taken several major steps in enhancing further career development to ensure that the individual and professional progress of performers with strong potential in the organization are managed carefully and deliberately. This not only ensures their retention, but their continuing growth, fulfillment, and preparedness to take on more significant responsibilities as the need arises.
 

Reaping Rewards

We have no doubt that the well-calculated business initiatives, new products, and infrastructure improvements undertaken in the year 2004 will bear even more impressive results down the road. One clear signal that such anticipated success is well founded is the very positive response that some of these efforts received early on. Another such indication is the series of accolades and milestones we attained in 2004 for similar ventures undertaken in years past, but which continue to reap honors for Security Bank today.

Our Internet-based corporate cash management system, Digibanker, garnered its 1,000th customer in early September 2004, exactly three and one-half years after it was launched. This translates to an acquisition rate of about twenty-four connections a month or one per business day since the product was released in March 2001. In addition, the business volume of one of DigiBanker’s best-selling product modules, eFPS RealTime, grew 70% in 2004, and today already moves a fifth of all taxes paid in the Philippines electronically and securely to the Bureau of the Internal Revenue.

We are extremely proud that SB Cards Corporation (SB Cards), the Bank’s credit cards subsidiary, won the “Best Franchise Award” for Diners Card in the Asia-Pacific region. Diners Club International bestows this seal of approval on the franchise demonstrating the highest new card growth, excellent brand exposure, and a good balance in marketing activities between card issuance and merchant acquisition and support. More significantly, in achieving this recognition, SB Cards bested its peer franchisees operating in the region, many of which are located in better-developed economies.

Not to be outdone, SB Equities Inc., the bank’s stock brokerage house, continued the aggressive sales and marketing efforts that propelled its business rapidly upwards two years ago, retaining its place at the number one spot among bank-owned brokerage firms in terms of total value traded. In doing so, SB Equities Inc., likewise maintained an enviable position among the top ten stock brokerage houses in the country. Later in the year, SB Equities Inc., received three awards for its sterling sales performance from the Fund Managers’ Association of the Philippines (FMAP): Best in Sales, Best in Sales Execution, and an individual award for Best Salesperson & Trader for one of its key officers.

Asiamoney in its 2004 Broker’s Poll of over 80 foreign fund managers cited SB Equities, Inc., as the 3rd Best Local Brokerage House in the Philippines, reaffirming its world-class level of management expertise.
 

Further Ahead with FIRST

Along with the major stakeholders and senior officers of the Bank, we have remained confident of consistently replicating, if not exceeding, our past successes, despite the numerous competitive and economic challenges facing us. Our performance over the past five years, and particularly in the year 2004, has proven that these convictions were not unfounded. However, our confidence in improving results steadily over time is not rooted in what we have accomplished in the past; rather, it rests firmly on the ability of each and every Security Banker to uphold the utmost principle of FIRST Priorities: putting the customer at the center of all our decisions and actions.

Before concluding, we wish to extend our heartfelt appreciation to Security Bankers everywhere, especially those who have fully embraced our FIRST Priorities strategy, and, more importantly, taken visible and tangible action to ensure its success. As always, we are likewise grateful for the leadership and guidance of our Board of Directors. 

We have said it before – customer focus equals sustainable success. Going forward, Security Bank’s 54th year will be, for many if not all of us, an indisputable reminder of that fact. Beyond that, we are confident that FIRST Priorities well after its third and final year comes to pass, will be a continuing journey for all Security Bankers.

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Click here to view 2004 Annual Report in PDF format.